U.K. House-Price Slump Will Persist Until 2012
News Article Date: Wednesday 22nd of July 2009
The U.K.’s house-price slump will persist until 2012 and hurt consumer spending, the National Institute of Economic and Social Research said.
Home values will resume their decline because recent gains were driven by a lack of available homes and the number of mortgages remains 65 percent lower than before the financial crisis, the London-based institute said today. It also predicts gross domestic product will keep falling until the final quarter of this year.
“There has been talk of stabilization and some recovery in the housing market, but we don’t think this is the case,” Simon Kirby, an economist at Niesr, told reporters yesterday. “We only see growth in the housing market returning in 2012.”
The Bank of England said this week that mortgage lending may strengthen in coming months, while Nationwide Building Society says that house prices increased in June. The economy has yet to emerge from recession after contracting the most since 1958 in the first quarter.
“The temporary rise in prices is probably the result of limited supply,” the report said. The institute’s clients include the Treasury and the Bank of England.
Falling house prices will hurt consumer spending growth in the next two years, Niesr said. Together with rising unemployment, this will encourage an increase in the household savings ratio to the highest level since 1997 next year, the institute predicted.
Government borrowing will peak at 12 percent of GDP in the fiscal year ending March 2010, or 165.7 billion pounds ($273 billion), before shrinking to 7.5 percent of GDP in 2013-14, Niesr said.
GDP slumped 2.4 percent in the first quarter. Niesr estimates that it fell 0.4 percent in the second quarter. The median forecast of 32 economists in a Bloomberg News survey is for a 0.3 percent drop. The Office for National Statistics will release the data on July 24.
The economy will grow again in the fourth quarter, by 0.5 percent, the institute said.
“The recovery will be weak,” Kirby said. “We see continued contraction in consumer spending and business investment.”
Bank of England policy makers are spending 125 billion pounds of newly printed money on assets to help bolster the economy. Minutes showing how they voted at the July 9 meeting, when they decided to maintain the size of the current buying program, will be released today at 9:30 a.m. in London.
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